NextWave Telecom's Twisted Tale

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NextWave Telecom's Twisted Tale

A) A group of scheming entrepreneurs squatting on a multi-billion dollar government asset who are motivated by little else than the desire to line their own pockets at the public's expense.

Or,

B) A forward-thinking telecommunications company that has been woefully mistreated at the hands of a government bureaucracy bent on terminating its lawfully obtained right to use the public airwaves.

On the "A" side is the Federal Communications Commission, which has been arguing for years that NextWave, a company best known for bidding billions for wireless telecommunications licenses and then declaring bankruptcy, should give up its claims to the public airwaves.

On the "B" side is NextWave itself, which says the government violated bankruptcy laws when it reclaimed a valuable block of spectrum licenses that the company won at an auction but failed to pay for on time.

Last week, the U.S. Supreme Court indicated it will step into the debate – albeit on more narrowly defined terms – when justices agreed to hear an FCC appeal seeking to reverse a NextWave legal victory.

The decision, expected early next year barring a settlement, should determine what becomes of billions of dollars in payments promised for wireless spectrum licenses that the FCC re-auctioned in 2001. It may also offer a crucial interpretation of how bankruptcy laws apply to sales of rights to publicly owned assets.

As the court hearing approaches, no single party has more riding on the outcome than NextWave itself. After four years spent in bankruptcy reorganization, the embattled wireless company now stands to lose its only substantial asset.

The court's intervention also comes at a time when NextWave, criticized for never actually launching its much-talked-about wireless service, was taking steps to resuscitate its image. The firm, once characterized in a letter by Sen. John McCain (R-Arizona) as "a company whose only contribution to the American economy has been to manipulate, for private gain, the results of an improperly designed auction," announced in February that it's testing a high-speed mobile Internet service for rollout later this year. Now, the company will be devoting much of its energy again to legal matters.

Things are looking up a bit for the FCC, however. The court's move gives the agency a better chance of accomplishing what it tried to do a year ago, which is to resell NextWave's spectrum to larger, financially solvent companies. Fourteen months ago, the FCC secured bids from Verizon and subsidiaries of AT&T Wireless, Cingular and other big telcos who agreed to pay more than $16 billion for NextWave's old licenses.

The prospect of billions from Verizon and its ilk, in fact, has the agency wondering why it ever decided in the first place to hold an auction exclusively for small businesses -which is how the whole mess began.

How It All Began

Seamus McAteer, an analyst for the research firm Zelos Group, calls the dispute between NextWave and the FCC a "tawdry tale of greed."

NextWave Telecom was formed in 1995 by a group of telecommunications executives led by Allen Salmasi, the former president of Qualcomm's wireless telecommunications division.

The company's plan at inception was to participate in a series of auctions organized by the FCC to sell small businesses licenses for airwaves to be used in wireless telecommunications services. NextWave's plan was to outbid as many rivals as possible and win enough licenses for a national network.

It was never NextWave's intention to sell wireless services directly to customers. The company's publicly stated business plan was to become a "carrier's carrier," which would collect fees from other wireless companies that used its network.

The upstart firm attracted a number of prominent backers, including Qualcomm and investment group Cerberus Partners. It also got financing commitments from Lucent, Hughes and Nortel to build its service.

NextWave's high-bidding ways proved successful at the spectrum auction. The company submitted the winning bids for licenses covering 95 urban areas in the United States. It agreed to pay the FCC $4.7 billion in installment payments for the licenses.

Shortly afterward, NextWave made the minimum 10 percent down payment of $500 million for the spectrum. The company agreed to pay the remainder over 10 years.

Problems Arise

The installment payments never came. Instead, two years after making its down payment, NextWave Telecom filed for Chapter 11 bankruptcy.

NextWave said it went into bankruptcy after failing to line up credit to cover the hefty installment payments owed to the FCC. In bankruptcy court, the company claimed it was not at fault for the missing payments.

"The problem was not the size of our bids but the collapse of the spectrum market," said Michael Wack, NextWave's deputy general counsel.

NextWave claims the FCC flooded the market with spectrum following the auction in which it participated. The oversupply depressed prices, making NextWave unable to find financing to cover its bids.

NextWave wasn't alone in its plight. According to the FCC, the holders of 337 licenses went bankrupt in the late 1990s. NextWave owns 216 licenses.

But telecommunications regulators had little sympathy for those who bid more than they could afford and then failed to pay on time. The FCC said it automatically canceled NextWave's licenses when the telco failed to make its first installment payment in October 1998.

Although companies in bankruptcy court are typically allowed a reprieve from creditors, the FCC has consistently argued that the privilege should not apply to spectrum licenses. Because spectrum is a public asset, it should not be left unused while a company that failed to make payments meanders its way through the bankruptcy process.

"Allowing a company to keep its licenses despite its failure to pay on time would be unfair to others who played by the rules and (would) undermine the integrity of our auctions process," Bill Kennard, the FCC chief under the Clinton administration, said in early 2000.

NextWave, meanwhile, vigorously disputed the agency, both in court and in the corridors of Washington.

Of Lawyers and Lobbyists

Campaign contribution records show that NextWave was a politically well-connected company even in bankruptcy. Between 1999 and 2000, its CEO, Salmasi, and his wife, Nicole Salmasi, contributed more than $40,000 to candidates and political action committees, according to the Center for Responsive Politics.

According to the center, Salmasi also gave $10,000 to a legal defense fund for Sen. Robert Torricelli of New Jersey. Torricelli later went on to file a legal brief in support of NextWave, which was at the time defending itself before the federal appeals court in Washington.

The company also spent liberally on lobbyists. In addition to hiring the well-known Washington lobbying firm Dewey Ballantine as a principal lobbyist, it enlisted Norm Brownstein of Denver's Brownstein Hyatt & Farber and the late Barbara Olson, a lobbyist with strong ties to the Republican Party.

NextWave also spent on lawyers with mixed results.

In 1999, NextWave succeeded in convincing a bankruptcy court that it had been unfairly forced to overpay for spectrum. The bankruptcy court ruled that NextWave should only have to pay $1.02 billion, which it believed to be the current fair market value for the licenses.

The company also attracted fresh investments from the now-bankrupt Global Crossing (at the time a high-flying public company), Liberty Media and Texas Pacific Group, among others.

A federal appeals court in New York quickly overturned the decision. The following year, it ruled that the bankruptcy court lacked the authority to interfere with the FCC's auction system.

The decision provided the victory the FCC had been hoping for. The agency took back NextWave's spectrum and re-auctioned it in January 2001. By that time, spectrum prices were back up again, since no new spectrum had been sold for quite some time.

This time around, the bidders offered upwards of $16 billion for NextWave's licenses – which the bankrupt company claimed it still owned.

After fighting the FCC for years, NextWave's last hope for getting back the licenses lay with an appeal pending before the U.S. Court of Appeals in Washington.

To help its case, NextWave employed the legal talents of Theodore Olson, who is currently the Bush administration's solicitor general and was at the time best known for arguing the president's case before the Supreme Court in the Florida election controversy.

In arguing NextWave's case, Olson focused on the principle that a federal agency should not be exempt from laws that apply to other creditors.

NextWave's investment in the appeal paid off. In June, the appeals court published a ruling in favor of the bankrupt wireless firm. The court concluded that the FCC violated federal bankruptcy laws when it took back NextWave's licenses while the company was still in Chapter 11.

Two months later, the FCC returned the disputed licenses to NextWave. The company lined up $2.5 billion in financing from the investment bank UBS Warburg, which it said would fund the construction of a third-generation, or 3G wireless data network.

A Settlement Reached and Rejected

Back at the FCC, the battle wasn't quite over.

The agency – which had just received commitments from telcos willing to pay about $16 billion for NextWave's licenses – wasn't happy to see them go for a measly $4.7 billion.

In the interests of getting an amount larger than NextWave's bid, the FCC worked with the bankrupt telco and the winning bidders in the re-auction to cobble together a settlement.

The resulting plan – which was presented to members of Congress for approval in December – gave NextWave a generous cash settlement in exchange for giving up the spectrum licenses it controlled.

Under the terms of the agreement, telecom firms, including Verizon Wireless, would pay $15.9 billion for NextWave's spectrum licenses. Out of that payment, the government would get $10 billion, and NextWave would get the rest: $5.9 billion.

"While it surely would have been preferable to have carried through on the re-auction and collect the $16 billion that was bid, that option was extinguished by the court and I believe this settlement is the best outcome under the circumstances," he said when the settlement was proposed in November.

But the leaders of the Senate Commerce Committee, who would have to approve the settlement, thought otherwise.

The deal, which required approval from Congress, didn't get its rubber stamp from the Senate Commerce Committee. Sen. Fritz Hollings (D-South Carolina), the Senate Commerce Committee chairman said the deal was a "windfall" for a bankrupt company.

"This private, backroom settlement is fundamentally at odds with telecommunications law and has been presented to us at the 11th hour," Hollings said in a letter urging his colleagues in Congress to kill the deal.

The committee's ranking Republican, McCain, joined Hollings in rejecting the settlement.

When asked whether NextWave would have accepted a lower settlement, the company's general counsel, Frank Cassou, said it would depend on the overall offer.

"It's a collection of things, not just a number," he said.

As it stands, NextWave could re-sell licenses once it holds them for five years and meets certain milestones for building out its network, Wack said – provided NextWave gets to keep the licenses, that is.

NextWave spent approximately $270,000 on lobbying efforts in the last six months of 2001, the most recent reporting period. It's unclear how much was spent by the opposing side, which includes Verizon and AT&T Wireless, solely on the spectrum issue, although Wack said he believe the sums were greater.

For now, any talk of a network rollout by NextWave is overshadowed by the prospect of a Supreme Court ruling in favor of the FCC.

In the interim, the FCC is drawing emphasis in its court filings to NextWave's virtually nonexistent track record as a wireless service provider.

"Respondents have held some of the most valuable spectrum in the nation for five years, but have spent most of that time restructuring in bankruptcy," reads a recent filing. "As a result, they have yet to provide service to a single customer."

Not a single wireless customer, that is.

So far, the ongoing dispute has done plenty to service the coffers of legislators, lawyers and lobbyists.